Viewpoints : The Air Fare Puzzle : Some contend that airline mergers and deregulation have reduced competition and boosted passenger rates. Should Congress intervene?

R ecent reports from the General Accounting Office and Department of Transportation contend that reduced competition, anti-competitive practices and capacity limits are raising airline fares. In response, Sens. John C. Danforth (R-Mo.) and John McCain (R-Ariz.) recently introduced the Airline Competition Enhancement Act. The bill would seek to increase competition by requiring airlines to sell their computer reservation systems, extend to the airline industry the Federal Trade Commission Act prohibiting unfair competition, revise the current system of takeoff and landing rights, and allow local airports to tax passengers to finance airport expansion.

To gather opinions on issues raised by the bill, Times researcher Melanie Pickett interviewed Alfred E. Kahn, a Cornell University professor and chief architect of airline deregulation while former chairman of the Civil Aeronautics Board, and Michael E. Levine, dean of the Yale University School of Management and former staff member of the Civil Aeronautics Board. Also included are statements from Danforth and testimony from Robert L. Crandall, chairman of American Airlines.

Should airlines be subject to antitrust regulations under the Federal Trade Commission Act?

Danforth: Airlines are no longer regulated, so the only way they are governed is through competition. They should play by the same antitrust laws as other industries. Applying the FTC Act to airlines will allow airlines that suspect they are the target of unfair pricing techniques to seek relief from the FTC. It would also enable them to challenge dominant carriers’ control of terminal, gate and baggage handling facilities.

Kahn: When we deregulated the airlines, we certainly did not intend to exempt them from the antitrust laws.

Should passengers be required to pay a new tax tacked on to their ticket price, to finance airport construction?

Levine: It is, on the whole, not a bad way to raise money. My concern is that cities have a monopoly over their own airports (and) cities often have political agendas other than expanding their airport capacity. The port authority in New York has for years used the airports as a source for all kinds of things, whether it was jobs for politically favored contractors or financing a fleet of buses for their rapid transit system. . . . My prediction would be that most authorities would raise money from the taxes, use some of it to expand airports but siphon a fair amount of it off.

Crandall: Personally, I have no philosophical objection to passenger facility charges so long as the enabling legislation contains adequate safeguards to preclude their use for any purpose other than airport development. I do believe, however, that any such charges ought to be part of a cohesive pattern of taxes and user charges at both the federal and local levels to ensure adequate capital investment in the airports and airways system.

Should takeoff and landing rights (slots) at airports be reallocated to allow entry of other airlines?

Danforth: In 1985, we saw one of the great government giveaways of all time when the Department of Transportation gave airlines, without charge, the slots they were then holding. The DOT allowed them to buy and sell these scarce rights, which have commanded prices of up to $1 million each. . . . Slot holders know that without a slot, no competitor can enter a market with one of these four airports (Chicago’s O’Hare, Washington’s National and New York’s Kennedy and LaGuardia) as an end point. Small or medium-sized airlines cannot afford slots, and even if they could, those holding them will not sell.

Our bill would eliminate the buy-sell rule and recapture the windfall that was given the dominant airlines in 1985 by taking the slots back and auctioning them off. The proceeds of the auction would go for airport expansion, which will help eliminate capacity problems at overcrowded airports. Also, it would encourage new entry by giving entrants slot preferences and limiting the number of slots any airline can own.

Crandall: The fact that operations are limited at four so-called high-density traffic airports by means of a slot requirement is a national disgrace. It exemplifies the monumental failure of the federal government to fulfill its responsibility of developing an airport and airways system capable of handling the growth in air transportation brought about by deregulation. . . . While we are not opposed to the entry of other carriers into slot-controlled airports, the withdrawal of slots from incumbents is neither equitable nor an appropriate method of achieving that end.

A much better approach would be to compel the FAA to add one slot per hour at LaGuardia and National--the two airports at which there is unsatisfied demand by new entrants and small incumbents. . . . The slots provided in this fashion would appear to be sufficient to meet the needs of new entrant and small incumbent carriers without disrupting the schedules of other airlines.

Kahn: Various studies, including those by the GAO and the testimony by the airports people, seem to clearly show that a company is not going to sell its slots to a competitor. I’m not at all clear why it’s the airline companies that should be permitted to pocket the benefits of scarcity that was created because there are inadequate slots. It gives an enormous financial advantage to the companies who happen to be there first.

Should computerized reservations systems (CRS) be removed from control of individual airlines?

Danforth: Department of Transportation studies have found that travel agents favor CRS-owning airlines in booking flights. . . . The CRS-owning airline can outmaneuver its competitors because it updates its own fare and seat availability in the system more quickly than its competitors’ information. CRS owners charge non-owner airlines a booking fee of about $2 a flight segment. This gives the CRS-owning airline an annual subsidy of $300 million from (its) competitors. If a fledging airline attempts to create its own CRS, it finds that the travel agents have contracts that severely penalize them for switching from one CRS to another.

Crandall: The view that competition is lacking in the CRS business has always puzzled me. . . . Although SABRE (American Airlines’ system) continues to be the largest CRS vendor with a market share of approximately 37%, that fact should hardly be surprising since we pioneered the development of the business and have consistently offered a system that is technically superior to some of the others.

Even if American’s ownership of SABRE does give it some competitive advantage as an airline, is that a reason for divestiture? Every airline has some competitive strengths, just as every airline has some competitive weaknesses. Many airlines enjoy a much lower cost structure than American because they pay lower wages and offer fewer benefits to employees. Others enjoy a competitive advantage in the form of higher yields because of the less competitive composition of their route systems.

Kahn: American Airlines points out that originally they proposed and were in favor of computerized reservations systems’ being developed by the industry in concert. It’s one of the dumbest things the Department of Justice ever did in saying they wouldn’t look kindly on that. It may well be that the provision of computerized reservations is best organized as a monopoly serving everybody.